Mumbai office shift: Is it about rentals or floor space?

Mumbai, the business capital of India, has slipped to the 15th position in the list of cities having the world's most expensive office spaces, according to an annual report by property advisory Cushman and Wakefield. The list is based on rental rankings.

An office space in central business district (CBD) Nariman Point, Mumbai, used to be a coveted and pricey possession for corporates. But according to the report, the commercial rent in CBD has dropped from an average of Rs 300 per square foot to Rs 275. This means that rates in Nariman Point have dropped almost 11 percent, which may have resulted in the slippage in global ranking.

"Nariman Point has seen a steady and perhaps planned decline in the last few years as other micro markets like BKC and Lower Parel recorded a corresponding rise," said Ravi Ahuja, Executive Director, Cushman and Wakefield, India.

Pankaj Kapoor, Managing Director at real estate consulting firm Liases Foras, also says that Mumbai is indeed facing a demand crunch. Since BKC and Nariman Point office rentals are at par- Rs 200-225 a sq feet- corporates are shifting base to the latter because of its critical mass appeal and strategic location, he hold Firstpost.

With a bleak economic outlook, slowdown in demand and lack of demand from the financial sector, commercial realty in India has seen a sharp dip in rentals, he said.

Even Samanthak Das, national research head at property advisory firm KnightFrank agrees that corporate houses have shifted base from posh locations like Nariman Point to more consciously planned and decongested areas like Bandra Kurla Complex.However, he believes that there has been a general stagnation in all micro-markets through Mumbai in the last six months.

"In the last two quarters there has been no appreciation in rental and the fall was negligible. It will take another two months for rental yields to recover, " he told Firstpost.

Indeed, over the past few years, top corporates such as Hindustan Unilever, Kotak Mahindra and even the American Consulate have vacated their south Mumbai offices and shifted to the suburbs, which offer more space and newer infrastructure.

Another industry expert pointed out that the shift in base is a result of bigger floor area. Barring a few premium offices, Nariman Point has barely any floor to offer when compared to residential areas like Bandra Kurla Complex and Lower Parel.

"Commerical realty is independent of factors that guide residential real estate market. Hardcore factors like larger floor plates, better construction quality and closer to where the working population lives matter," he told Firstpost on condition of anonymity.

BKC has been inching upwards in terms of rental values (6 percent) owing to a steady demand from sectors such as BFSI, Consulting and other sectors. While locations of Andheri, Kurla and other western suburbs are catering to the requirements of back office operations.

Mumbai no longer features among the top ten commercial real estate markets in the world.

In 2011, Mumbai held sixth position on the list of most-expensive offices spaces in the world. However, because of the eurozone crisis, several companies, especially in the IT-ITes and financial services sectors are cautious on expansion plans, which has driven down demand for office space in Mumbai.

Other cities, nevertheless, continue to hold on to their positions on the list: Hong Kong, London and Tokyo maintained their top three slots from last year. There were also new entrants to the list: Beijing came in at number five, while Sydney ranked seventh.

Other markets in the top ten include Moscow, New York, Rio de Janiero, Paris and Zurich.